UK/EU Investment Management Update (May 2026)

In this Sidley Update we cover, on the UK side, the Financial Conduct Authority (FCA) final policy statement on the new UK short selling regime; the FCA, Prudential Regulation Authority and HM Treasury updates on reforming the Senior Managers and Certification Regime, FCA enforcement and supervisory updates relating to client money controls, appointed representatives, and asset management authorisation applications; the FCA final rules and guidance on tokenised authorised funds and the new "direct to fund" dealing model; and developments on market abuse information sharing, cryptoasset authorisation, artificial intelligence, cyber resilience, and sanctions enforcement.

On the EU side, we cover the European Central Bank opinion on the European Commission EU market integration and supervision proposal, including proposed centralised supervision by the European Securities and Markets Authority (ESMA) of certain cross-border market participants and cryptoasset service providers; regulatory technical standards on investment firms’ order execution policies; ESMA’s final report on fund data collection, calls for evidence on transaction reporting and equity market structure, and templates for active account requirement reporting under the European Market Infrastructure Regulation; and developments on environmental, social, and governance ratings, private credit ratings, securitisation, capital requirements, benchmarks and anti-money laundering requirements.

1. UK - Short Selling

2. UK - SMCR

3. UK - Enforcement

4. UK - FCA General Updates

5. UK - Market Abuse

6. UK - EMIR

7. UK - Cryptoassets and Tokenisation

8. UK - AI

9. UK - Sanctions

10. UK - Tax Update

11. EU - Capital Markets

12. EU - Fund Data

13. EU - MiFID / MiFIR

14. EU - EMIR

15. EU - ESG

16. EU - Private Credit

17. EU - Capital Requirements

18. EU - AML

 

1. UK - Short Selling

FCA publishes policy statement on the new short selling regime

On 16 April 2026, the Financial Conduct Authority (FCA) published policy statement PS26/5 outlining the FCA’s final approach to the new UK short selling regime. This followed the FCA’s previous consultation, which we covered in our November 2025 Update. Further to the UK Short Selling Regulations 2025, the FCA will introduce a new Short Selling Rules sourcebook in the FCA Handbook to replace the current rules in the UK, which originate from the retained EU Short Selling Regulation (which remains applicable in the EU).

Please see our Update New UK Short Selling Regime — Analysis of Final Rules (May 2026) for our thoughts on the final rules.

2. UK - SMCR

FCA, PRA, and HMT issue updates on reforming SMCR

As covered in our August 2025 Update, proposed reforms to the Senior Managers and Certification Regime (SMCR) encompass “Phase 1” reforms, which do not require primary legislation (as proposed by the FCA and the Prudential Regulation Authority (PRA)) and “Phase 2” reforms (which require primary legislation proposed by HM Treasury (HMT)).

On 22 April 2026, the FCA (PS26/6) and PRA (PS12/26) each published policy statements finalising the proposed Phase 1 reforms to the SMCR. Both the FCA’s and PRA’s Phase 1 reforms are being implemented largely as consulted on in July 2025 and mostly took effect on 24 April 2026.

The key changes include:

• extending criminal record check validity from three to six months and removing such requirements for internal or intragroup moves; 
• allowing firms 12 weeks to submit a senior management function (SMF) application;
• giving firms up to six months to notify changes to Statements of Responsibilities (SoRs) and Management Responsibilities Maps; and
• providing guidance on prescribed responsibilities and recertification under the “fit and proper” test.

Further FCA changes will take effect on 10 July 2026, including increases to certain enhanced SMCR thresholds and removing overlapping certification requirements. Minor amendments, aligned with the FCA’s non-financial misconduct reforms (detailed in our January 2026 Update), will take effect on 1 September 2026.

Separately, on 22 April 2026 HMT also published a consultation outcome confirming that it will proceed with Phase 2 legislative reforms. These reforms include (i) removing the Certification Regime from legislation and transferring it to the FCA and PRA rulebooks, (ii) reducing the number of SMFs requiring regulatory pre-approval, (iii) removing legislative requirements relating to SoRs, and (iv) repealing prescriptive statutory requirements for Conduct Rule breach notifications.

HMT intends to introduce primary legislation when parliamentary time allows, following which the FCA and PRA are expected to consult on further rule changes.

3. UK - Enforcement

FCA issues final notice to investment firm for client money failings involving appointed representative

On 20 April 2026, the FCA published a Final Notice imposing a public censure on the UK-authorised firm Sapia Partners LLP (Sapia) for client money failings relating to one of its appointed representatives (ARs), Vertus (later named WealthTek).

During the relevant period of 1 January 2014 to 31 October 2020, Sapia held client money attributable to Vertus’ activities and, as a principal firm, was responsible for compliance with CASS 7 and Principle 10 of the FCA Handbook. The FCA found that Sapia failed to take sufficient steps to ensure adequate segregation between the individuals making payments out of client money accounts and those carrying out reconciliations. In practice, the same individuals at Vertus were involved in both processes, including where the client money was attributable to Vertus’ activities as Sapia’s AR.

The FCA found that Sapia breached Principle 10 and the relevant client money organisational arrangements rules found under CASS. The FCA stated that the failings persisted for six years and exposed approximately £150 million of client money to risk. Sapia has subsequently agreed to make a voluntary payment of over £19.6 million for distribution amongst clients of WealthTek.

In light of Sapia’s cooperation, acceptance of failings, and voluntary payment, the FCA elected to impose a public censure rather than a financial penalty. The FCA stated that absent those factors, it would have imposed a penalty of £10.5 million (reduced to £7.4 million for settlement).

This enforcement action highlights the importance of principal firms remaining responsible for ensuring compliance where operational processes are performed by AR personnel.

FCA spearheads global action to stop illegal finfluencers

On 24 April 2026, the FCA announced that it had led international action against illegal “finfluencers,” together with 17 regulators worldwide. This involved enforcement activity, consumer awareness campaigns, and educational programmes for finfluencers.

In the UK, the FCA obtained a guilty plea from an individual for illegal financial promotions on social media, with criminal proceedings commenced against a further two individuals for similar offences. The FCA also sent targeted warning letters to individuals suspected of engaging in unauthorised financial promotions, issued warning alerts against unauthorised firms or individuals, and made account takedown requests to social media platforms hosting illegal finfluencer content. Within those accounts, the FCA identified over 1,200 illegal financial adverts, which reached at least 2.3 million UK accounts. Two-thirds of those adverts came from firms or individuals already on the FCA’s Warning List.

4. UK - FCA General Updates

FCA publishes findings of review of how principal firms manage risks from inactive appointed representatives

On 21 April 2026, the FCA published a webpage detailing findings from its supervisory work on how authorised principal firms manage risks from “inactive” ARs that have reported no regulated activity for a period of time.

The FCA notes that there may be legitimate reasons why an AR does not report regulated activity, particularly where regulated activity is incidental, arises only occasionally, or does not generate revenue for an extended period. However, an unexplained absence of regulated activity may indicate weaknesses in a principal’s governance, monitoring, oversight, or risk management.

The FCA assessed two years of return data to assess whether principals could explain the absence of regulated revenue, report AR activity accurately, and demonstrate effective oversight. Examples of good practice identified by the FCA include principals:

• establishing clear expectations during AR onboarding of expected regulated activity (including greater monitoring during early stages);
• having a clear understanding of AR activity;
• incorporating data-led oversight, including using Companies House alerts and reviewing AR websites/marketing materials; and
• intervening early where expected activity did not arise.

The FCA also identified the following areas for improvement, focusing on principals:

• failing to maintain a clear understanding of AR business models;
• allowing ARs to remain within principal networks for extended periods without regulated activity;
• using suspension as an indefinite alternative to reassessment or termination; and
• failing to monitor consumer-facing materials.

The FCA also noted a growing trend of ARs incorrectly describing themselves as “authorised representatives,” which is not the correct designation for an AR. The FCA expects principals to consider whether oversight, monitoring, and governance remain appropriate where ARs are inactive, give clear explanations in regulatory returns, take timely action to terminate AR relationships where they are no longer appropriate, and notify the FCA when an AR’s status changes.

FCA publishes list of common issues with asset management authorisation applications

On 9 April 2026, the FCA published a webpage listing common issues it encounters in applications for FCA authorisation from firms in the asset management sector, highlighting that 14% of applications submitted between September 2024 and September 2025 were either rejected or withdrawn due to poor quality or incomplete information.

The FCA noted the following common issues in applications:

• Office location. The FCA expects day-to-day decision-making regarding portfolios, distribution, and risk to occur within the UK by senior managers who have the legal right to work there.
• Outsourcing. Where firms outsource activities, the FCA expects that the firm will oversee the arrangement and remain accountable for compliance.
• Business models. Proposed business models should clearly articulate how risks to clients and market integrity will be mitigated.
• Conflicts of interest. The firm should consider any applicable conflicts rules and detail how it will identify any conflicts of interest.
• Understanding the regulatory status of clients. Firms should have clear policies that comply with the relevant rules for their clients.
• Redress. Firms should ensure that clients have access to appropriate schemes to protect them.
• Changes to the scope of permissions. If applying for a variation of permission, firms should clearly explain how the permissions will be used and the impact on the business.
• Fund particulars. Firms should include sufficient information in their fund documentation and include draft documents in their application.

FCA publishes Handbook Notice 140

On 24 April 2026, the FCA published Handbook Notice 140, setting out changes to the FCA Handbook made in March – April 2026. In particular, these changes cover the introduction of the new Short Selling Rules sourcebook and the first phase of reforms to the SMCR, each as detailed above. Handbook Notice 140 also confirms changes to the UK Listing Rules (including clarificatory amendments to listing processes and procedures), Financial Services Compensation Scheme management expenses levy limit, and motor finance redress scheme instruments.

FCA publishes consultation on accelerating information flows for equity IPOs

On 27 April 2026, the FCA published consultation paper CP26/14 on proposed amendments to FCA rules governing analyst research and information flows in UK equity initial public offerings (IPOs). The consultation is open for feedback until 29 May 2026.

For details, see our Update Cutting the Queue: FCA Moves to Speed Up UK IPOs.

Investment Association publishes guidance on clearer investment risk disclosures

On 9 April 2026, the Investment Association published guidance (the IA Guidance) for firms on disclosing risks in mainstream investment promotions, alongside a report (the IA Report) on more effective risk communication for consumers.

The guidance offers a Consumer Duty–focused interpretation of the FCA’s existing financial promotion rules in Chapter 4 of the Conduct of Business Sourcebook (COBS) of the FCA Handbook. The IA Guidance provides worked examples to help firms move away from formulaic, defensive disclosures towards clearer, more contextual explanations of risk and reward suited to consumers.

The IA Report makes a number of recommendations to achieve longer-term clarity for firms when communicating investment risks. These include:

• amending COBS 4.2.4 and COBS 4.5 to permit contextual risk communication, including layered disclosure in digital channels, with “relevant risks” clarified as those material to the consumer’s decisions;
• reforming the standalone compliance principle to allow plain-language explanations of risk and reward across the consumer journey;
• aligning FCA supervisory practice with decisions of the Financial Ombudsman Service, noting that inconsistency between the two is a key barrier to firms adopting more effective approaches; and
• encouraging continued collaboration between industry and regulators.

Any formal changes to COBS 4 or related supervisory expectations following these proposals would require further FCA action.

5. UK - Market Abuse

FCA publishes Market Watch 85 on sharing customer information to combat economic crime

On 29 April 2026, the FCA published Market Watch 85, setting out how firms can use the information-sharing provisions under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). ECCTA allows anti-money laundering regulated firms to share customer information to help prevent, detect, and investigate economic crime and generally protects firms from breaches of confidentiality obligations or civil liability in these circumstances.

In particular, the FCA notes the application of ECCTA to investment firms sharing information about criminal market manipulation with another firm. ECCTA specifically covers offences under the Financial Services Act 2012 (misleading statements, misleading impressions, and misleading statements in relation to benchmarks). ECCTA does not currently apply to the UK’s criminal offence of insider dealing (under Part V of the Criminal Justice Act 1993) or the civil market abuse regime (under the UK version of the Market Abuse Regulation ((EU) No 596/2014)). However, the Home Office published a call for evidence in March 2026 asking whether ECCTA’s information-sharing measures should be extended to cover any other offences.

Additionally, Market Watch 85 summarises the conditions under which firms may share customer information under ECCTA, including where the firm has taken “safeguarding action” against a customer, or would have done so, and where a firm requests information from another firm because it reasonably believes it may help the firm take a “relevant action.”

ECCTA does not replace existing obligations on firms to submit suspicious activity reports or suspicious transaction and order reports, and information sharing is not a precondition to making such reports. However, the FCA notes that as part of its routine engagement, it will ask whether and how firms are using ECCTA to share such information.

The FCA notes that firms should consider:

• how ECCTA’s direct information-sharing measures apply to their own business; and
• when it would be appropriate to share information to counter the risks of economic crime.

For instance, a firm could use ECCTA to ask another firm for information about a customer it is providing services to. This could be a way of meeting its SYSC 6.1.1 obligations to counter the risk of being used for financial crime.

FCA publishes findings on market soundings in UK equity capital markets transactions

On 20 April 2026, the FCA published findings from its multi-firm review of market soundings in UK equity capital markets, focusing on wholesale banks involved in UK listed share transactions. The review considered how banks conduct soundings, the number of investors approached, the duration of soundings, and whether soundings affect market quality.

The FCA observed that market soundings remain an important tool for testing investor interest and supporting price discovery before transactions are announced and that trading volumes fell by an average of 13% during the market sounding period. However, the FCA did not identify material effects on other market quality measures, including spreads, market depth, and price behaviour. The review found that firms completed transactions across a wide range of sizes, indicating that UK equity markets continue to have capacity to absorb substantial transactions.

While the FCA does not prescribe a maximum number of investors that may be sounded, it reminds firms that the risk of inside information leaking may increase as the scale of a sounding grows. Firms should consider whether their policies and procedures appropriately address the size and scope of their market soundings, and the FCA will continue to engage with banks and market participants on their approach and controls.

6. UK - EMIR

ISDA and industry bodies call for higher commodity derivatives clearing threshold

On 9 April 2026, the International Swaps and Derivatives Association (ISDA), Commodity Markets Council Europe, Energy Traders Europe, and Futures Industry Association submitted a joint response to the FCA Quarterly Consultation CP26/8 on the commodity derivatives clearing threshold under the UK version of the European Market Infrastructure Regulation ((EU) No 648/2012) (EMIR).

The industry bodies support increasing the clearing threshold from €3 billion but argue that the FCA’s proposed €5 billion threshold should be raised further to €6 billion. The response notes that the threshold has not been reviewed for more than 10 years and has reduced materially in real terms due to macroeconomic factors. The industry bodies also argue that firms tend to operate materially below the formal threshold to avoid triggering mandatory clearing and margining, meaning the effective threshold is lower in practice and may amplify pressure during times of market stress.

The response emphasises that commodity derivatives markets are closely linked to physical production and commercial hedging. It warns that an insufficiently calibrated threshold could constrain hedging, reduce liquidity, and weaken UK competitiveness. The industry bodies therefore call for the interim threshold to be set at €6 billion while HMT carries out its broader review of the UK EMIR clearing framework and argue that any future threshold should not fall below that level.

7. UK - Cryptoassets and Tokenisation

HMT publishes policy note and draft statutory instrument on amendments to Cryptoassets Regulations

On 21 April 2026, HMT published a policy note and draft statutory instrument amending the Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2026 (the Cryptoassets Regulations). The Cryptoassets Regulations were made in February 2026 and establish a UK regulatory regime for cryptoassets, due to come into force in October 2027 (for further details, see our Update UK Cryptoasset Regulation — Action Points for 2026–27).

The draft statutory instrument is intended to provide greater certainty for firms seeking to provide payment services using UK-issued qualifying stablecoin (UKQS) ahead of the government’s wider payments reforms. In particular, the draft amendments would carve UKQS out of the newly introduced regulated activities, which will require firms to be authorised under the Financial Services and Markets Act 2000 (FSMA) (i.e., dealing in qualifying cryptoassets as principal, dealing in qualifying cryptoassets as agent, and arranging deals in qualifying cryptoassets). However, lending and borrowing activities involving UKQS would remain within the cryptoasset dealing perimeter so that the FCA can make rules addressing associated consumer risks.

Notably, the draft amendments would not remove the requirement for firms undertaking UKQS payments to obtain cryptoasset safeguarding permissions where they safeguard cryptoassets on behalf of customers. The government also proposes to clarify that the temporary settlement exclusion from cryptoasset safeguarding applies only where the activity is ancillary to dealing or arranging and does not apply to holding UKQS in the course of providing payment services.

The draft statutory instrument also includes consequential changes to the financial promotions perimeter and introduce early commencement for provisions that carve stablecoin backing assets out of the collective investment scheme and alternative investment fund perimeters as well as further changes relating to proprietary trading, market making, and central securities depositories.

Written feedback can be submitted to HMT until 22 May 2026.

FCA consults on perimeter guidance for regulated cryptoasset activities

On 15 April 2026, the FCA published CP26/13, consulting on proposed amendments to its Perimeter Guidance Manual (PERG) to clarify when cryptoasset activities will fall within the UK regulatory perimeter. The guidance is intended to help firms assess whether they need to be authorised under FSMA for the new regulated cryptoasset activities introduced by the Cryptoassets Regulations.

The proposed new PERG chapter is structured as Q&A guidance and covers the key perimeter questions firms will need to work through, including whether (i) the relevant asset is a qualifying cryptoasset, qualifying stablecoin, or specified investment cryptoasset; (ii) the activity is carried on in the UK and by way of business; and (iii) any exclusions apply. The chapter also gives guidance on the main new regulated activities.

The consultation closes on 3 June 2026, with final guidance expected in September 2026. The FCA expects the application window for firms seeking permission to carry on the new regulated cryptoasset activities to run from 30 September 2026 to 28 February 2027.

FCA provides information for firms preparing for cryptoasset authorisation

On 30 April 2026, the FCA published a webpage providing information for cryptoasset firms preparing for authorisation under the new UK cryptoasset regulatory regime.

The FCA encourages firms to begin preparing now and to develop a clear implementation plan. In particular, firms should review the new cryptoasset regulated activities, determine what type of authorisation is required, assess the proposed scope of permissions against their business model and risk profile, carry out a gap analysis against expected FSMA requirements, and consider the resources and costs associated with authorisation, including preparation and ongoing compliance. The FCA also encourages firms to apply as early as possible within the application window (as detailed in the above item, “FCA consults on perimeter guidance for regulated cryptoasset activities”). Firms that apply outside the application period, or submit poor-quality applications, may face rejection, delays, or refusals of authorisation.

The FCA will continue to support firms preparing for authorisation through data requests, direct engagement with registered firms, and targeted support. In particular, in a related press release, the FCA announced that firms can request a pre-application meeting from 11 May 2026 through its pre-application support service.

FCA publishes policy statement on progressing fund tokenisation

On 30 April 2026, the FCA published Policy Statement PS26/7, Progressing Fund Tokenisation, setting out final rules and guidance following its previous consultation, which we covered in our November 2025 Update. The new guidance for operating a tokenised authorised fund within the existing regulatory framework will be introduced largely as proposed, and the final rules and guidance came into force with immediate effect.

The policy statement finalises FCA Handbook guidance to support authorised fund managers seeking to maintain fund registers using distributed ledger technology. The FCA has confirmed that an on-chain record of transactions may be treated as the primary books and records for unit deals and that firms do not need to maintain a full ‘mirror’ off-chain record where they have appropriate resilience arrangements. The FCA has also clarified that units in the same class may be recorded on multiple blockchains, provided the underlying rights of holders and the nature of charges and expenses remain the same.

Additionally, the policy statement introduces an optional direct dealing model for authorised funds, referred to as ‘direct to fund’ (D2F). Under D2F, investor deals are effected through a single-stage issue and cancellation process between investors and the fund rather than through the authorised fund manager’s box. The FCA notes that D2F may support operational efficiency and tokenisation, including by facilitating atomic settlement on-chain for newly issued units.

The FCA has finalised the D2F rules largely as consulted on, with certain changes following feedback. In particular, it will allow firms to deal as principal in units of a D2F fund and to use different dealing models within a fund or sub-fund. The FCA has also decided not to proceed with its proposal to require unattributable payments to be moved to a client money account. Instead, the final rules include enhanced reconciliation requirements for Issues and Cancellations Accounts.

The FCA notes that further work is needed on the application of protected cell legislation to omnibus accounts used for D2F structures and that it is working with HM Treasury on this issue.

8. UK - AI

HMT, BoE, and FCA respond to Treasury Committee report on AI in financial services

On 16 April 2026, the House of Commons Treasury Select Committee (Treasury Committee) published responses from HMT, the Bank of England (BoE), and the FCA to the Treasury Committee’s January 2026 report on artificial intelligence (AI) in financial services (as covered in our February 2026 Update).

In their responses, the authorities reject the Treasury Committee’s characterisation in its report that they are taking a “wait and see” approach to managing AI risks. The responses emphasise that existing rules already require firms to manage AI-related risks through governance, operational resilience, data, and consumer protection obligations while the regulatory framework remains under review as the technology develops.

Additionally, the responses indicate that AI-related work will now focus on monitoring adoption, sharing practical insights, and testing resilience. HMT expects to make initial critical third-party designation decisions in 2026, while the BoE is incorporating AI scenarios into cyber and operational resilience testing and examining whether AI agents in financial markets could contribute to correlated or herding behaviour. The FCA will share further examples of good and poor practice as its AI Live Testing and sandbox work develops, with an evaluation report expected in late 2026 or early 2027 (see following item, “FCA speech on AI and increasing support for firms”).

Notably, the responses do not commit to adopting a standalone AI-specific rulebook. Instead, the authorities continue to favour a principles-based and outcomes-focused approach, supplemented by supervisory engagement, the BoE/FCA AI Consortium, the biennial AI survey, and targeted work on areas such as third-party concentration, explainability, operational resilience, and AI-driven market dynamics.

Separately, on 17 April 2026, the PRA published its 2026/27 business plan, identifying the safe adoption of AI by regulated firms as a supervisory priority. The PRA plans to monitor firms’ evolving use of AI and other novel technology arrangements, including reliance on third-party providers for services such as cloud, settlement, and potentially AI-enabled functions.

FCA speech on AI and increasing support for firms

On 21 April 2026, the FCA published a speech (“Supporting fintech in the next phase of innovation”) delivered by Jessica Rusu, the FCA’s chief data, information, and intelligence officer.

Notably, the speech stated that it remains the FCA’s intention not to introduce new AI rules at this stage. Instead, the FCA will use learnings from its AI Lab to publish examples of good and poor AI practice later in 2026. The AI Lab (which we previously covered in our November 2024 Update) is designed to be an environment providing support from proof-of-concept to market testing, where firms work through technical and regulatory challenges alongside the FCA. As part of the next phase of its AI Lab, the FCA is also extending its private sector partnerships with technology companies, including continued access to computing power and support after firms leave the AI Lab.

FCA shares Cyber Coordination Group insights into cyber resilience

On 24 April 2026, the FCA published a webpage summarising good and poor cyber resilience practice for firms following discussions in 2025 with its Cyber Coordination Group (CCG), which brings together firms from sector groups including investment and asset management.

The insights identified by the CCG focused on three key areas:

• Emerging technology. The FCA noted that there are significant cybersecurity implications to AI, quantum computing, and other emerging technology. The FCA notes that AI adoption and post-quantum cryptography migration (i.e., upgrading infrastructure and algorithms to secure information against future quantum computers) should be embedded within existing risk frameworks, supported by cryptographic hygiene and risk-based prioritisation. Notably, CCG members also reported a rise in threat actors using AI to enhance phishing (including voice phishing or ‘vishing’) and deepfake-enabled attacks, thereby making attacks more convincing, harder to detect, and faster to scale.
• Incident response. The findings focus primarily on incident response practices and firms’ recovery at scale. The FCA notes that active involvement from senior management in incident response exercises improves decision-making, communication, and confidence during live incidents. The FCA also highlights the benefits of robust testing, including in sandbox and live environments, and clear contractual obligations and expectations for key third parties during response and recovery.
• Insider risk management. The FCA highlighted that insider risk management is most effective where treated as an enterprise-wide issue, supported by behavioural analytics, access management, and clear communication. Firms should also consider privacy obligations, monitoring complexity and differing jurisdictional requirements when designing insider risk controls. 

9. UK - Sanctions

OFSI publishes three-year strategy to speed up sanctions enforcement

On 15 April 2026, the Office of Financial Sanctions Implementation (OFSI) published a three-year strategy setting out plans to accelerate its enforcement and licensing work. OFSI aims to submit 90% of new enforcement investigations for decision within 18 months of opening and to complete half of routine licensing cases within six months, with the aim of reducing delays for legitimate activity while supporting compliance with UK financial sanctions.

The strategy also signals a continued focus on deterrence and sanctions circumvention. OFSI intends to use public statements and case studies to demonstrate the consequences of non-compliance while continuing to deploy its enforcement tools, including settlements, fixed monetary penalties, reporting requirements, referrals, and counter-terrorism designations. Since 2021, OFSI notes that it has progressed more than 1,400 enforcement cases, issued 18 public enforcement decisions, and imposed more than £22 million in monetary penalties.

10. UK - Tax Update

New UK tax regime for carried interest comes into force

The new regime for the taxation of carried interest in the UK came into force on 6 April 2026. Details of the consultation process and proposed legislation have been covered in our prior updates (most recently see our July 2025 Update).

Key points to note

• Carried interest proceeds will now be subject to tax at income tax rates as deemed trading income. This will mean a combined top rate of income tax and National Insurance contributions of 47%, which will apply to “non-qualifying carried interest”. Proceeds of qualifying carried interest will benefit from a reduction in rate by application of a 72.5% multiplier, reducing that top rate to 34.075%. These tax rates will apply regardless of the underlying source of returns.

• Carried interest will be qualifying carried interest if it arises in respect of a fund with an average holding period (AHP) of more than 40 months (or, if the fund has an AHP of between 36 and 40 months, a proportion of carried interest will be treated as qualifying, and any remainder will be “non-qualifying”). The rules for calculating AHP of a fund are very similar to those used under the income-based carried interest (IBCI) rules that applied previously, but there have been some changes which improve the AHP calculation methodology. These changes are particularly helpful to credit funds and other funds holding debt investments; see our high-level summary below.

• As carried interest receipts are now deemed to be trading income for UK tax purposes, this means that the territorial scope of UK taxation of carried interest has significantly expanded. To the extent that carried interest is attributable to duties performed by an individual in the UK, that carried interest will theoretically be chargeable to UK tax regardless of where the individual is resident when proceeds arise, subject to the application of three statutory exclusions for non-UK residents:
  • Carried interest attributable to duties performed before 30 October 2024 will be deemed to be related to non-UK duties
  • Carried interest attributable to duties performed in a year where fewer than 60 workdays were performed in the UK will be treated as arising from non-UK duties; and
  • Carried interest arising after three consecutive “non-UK years” (being years in which the individual was not UK resident and had fewer than 60 UK workdays) will be treated as solely related to non-UK duties.

• It should be noted that the above exclusions apply only in respect of qualifying carried interest or, in the case of the second exclusion, to carried interest that was reasonably expected to be qualifying at the time UK work was performed. However, where carried interest is still taxable in the UK for a non-UK resident (either by virtue of being non-qualifying carry attributable to UK workdays or by virtue of not falling within one of the exclusions mentioned above), it may still be possible for the non-UK resident to claim relief from tax under a double tax treaty.

Noteworthy changes to the AHP rules

• New extension rules for “credit funds”
  • The new legislation includes a new specific set of AHP extension rules for “credit funds” (being funds that reasonably expect to invest more than 50% of their value in debt investments and more than 50% of their value in investments that are held for 40 months or more).
  • These rules treat multiple acquisitions of debt and equity in a borrower group as being made at the time of the first “significant investment” (broadly being an investment of £1 million or, if less, 5% of the total amounts to be raised from investors in the fund). A disposal of that investment is treated as made only when the credit fund’s investment in the group has reduced to at least 50% of the greatest amount invested by the fund in that group at any time. Early partial exits are therefore ignored for AHP purposes until that threshold is crossed.

• New general extension rules for debt investments made by any funds
  • Along with the specific set of extension rules for credit funds, there are various provisions which improve the AHP calculation for any fund holding a debt asset.
  • A prepayment extension is included that treats loans with terms of over 40 months that are repaid before 40 months as held for 40 months. This existed in the IBCI rules but applied only to primary loans that met a set of onerous conditions that were difficult to apply. It has now been extended to include all loans (so will include secondary debt acquisitions), and the conditions for it to apply are more straightforward to assess.
  • There is a rule that prevents a restructuring of a debt investment from being treated as a disposal of that investment where the fund remains exposed to substantially the same risks and rewards in respect of the debtor’s group.
    
    
• Combined new extension rules for funds of funds
  • The two separate sets of extension rules for fund of funds and secondary funds in the IBCI rules have been combined into a single set that applies to “funds of funds”, being funds that are expected to invest (i) at least 80% of their value in unconnected investment schemes, in direct co-investment, or in portfolios acquired from unconnected investment schemes and (ii) at least 50% of their value in investments which will be held for 40 months or more.
  • These rules provide that an investment by a “fund of funds” in an unconnected fund of at least £1 million (or, if less, at least 5% of the total amounts raised by the fund in which the investment is being made) is treated as being made on the date on which an unconditional subscription to the fund is made, meaning the entire commitment is treated as made upfront. That investment will not then be treated as disposed of until the date that the fund-of-funds’ remaining investment in the scheme is worth less than 5% of all investments made by the fund of funds in that scheme (or, if greater, £1 million).

Other points to note in the legislation

• It is worth noting that a change to the definition of “investment scheme” (which will apply for the purposes of both the disguised investment management fee (DIMF) and carried interest rules) means that the scope of those charging rules has expanded. The DIMF and carried interest regimes were previously limited in their application to amounts arising from a “collective investment scheme” (CIS) as defined in FSMA, or an investment trust. The FSMA CIS definition excludes bodies corporate other than open-ended investment companies, so certain corporate funds structures previously fell wholly outside the scope of the rules. The definition of “investment scheme” in the new legislation has been updated to include “AIFs” (alternative investment funds), which will bring many corporate funds within the scope of the DIMF and carried interest regimes.
• The new legislation specifically provides that tax distributions will be treated as carried interest. Many funds pay tax advances/distributions to carry holders to help them meet unfunded “dry” tax liabilities arising as a result of their holding of carried interest. Under prior legislation, the view was often taken that it should be possible to treat these amounts as carried interest, but this position was not free from doubt. It is therefore helpful to have a specific statutory provision confirming that view, albeit we note that the definition of “tax distributions” given in the legislation is limited to sums that arise only if tax (including non-UK tax) becomes payable or is expected to become payable as a result of the individual’s entitlement to carried interest. For tax advances made by a fund which fall outside this definition, it will be necessary to consider whether it is still possible to take the view that such amounts can be treated as carried interest on basic principles.

What next?

Carried interest receipts realised in this tax year will not be reported on UK tax returns until self-assessment returns are due on 31 January 2028. So, whilst the first reporting event is still some way off, there are actions that fund managers with UK presence should consider taking now in order to ensure they have the tax reporting information their executives will need when January 2028 comes around:

• Managers will need to keep track of fund average asset holding periods in order to determine whether carried interest in those funds is “qualifying” for UK purposes. This will be relevant for any funds from which carried interest may be paid post-6 April 2026.
• For non-UK fund executives who spend time working in the UK, it will be important to keep track of UK workdays in order to clarify the scope of potential UK tax exposure on their carried interest. Generally, a day will be considered a UK workday if an individual spends more than three hours working in the UK.

Please get in touch using the details at the bottom of this Sidley Update if you would like to discuss any of the points raised above in further detail.

11. EU - Capital Markets

ECB publishes opinion on EU capital markets integration package

On 9 April 2026, the European Central Bank (ECB) published its opinion on the European Commission (the Commission) EU market integration and supervision proposal (MISP) (as covered in our January 2026 Update). The ECB notes that it broadly supports the MISP, including the proposed move towards more centralised supervision by the European Securities and Markets Authority (ESMA) of certain large cross-border market participants, strengthened supervisory convergence, and measures to reduce barriers across trading, post-trading, and asset management. The ECB’s comments focus on ensuring that ESMA has sufficient governance, staffing, funding, and enforcement powers to carry out its expanded role. The ECB also recommends a broad non-voting role for itself in ESMA discussions.

The ECB also supports the Commission proposal to transfer supervision of cryptoasset service providers (CASPs) from national competent authorities to ESMA, as part of the MISP. The Commission’s proposal would replace the current framework under the Markets in Cryptoassets Regulation ((EU) 2023/1114) (MiCAR), under which CASPs are authorised by their home member state regulator and then passport services across the EU. Instead, CASPs would be subject to a more centralised supervisory model for systemically relevant firms. This would be intended to address perceived enforcement asymmetries amongst EU member states, where CASPs licensed in lighter-touch jurisdictions may face different levels of scrutiny despite benefiting from EU-wide passporting rights. The proposed centralisation may face resistance from EU member states that have developed established crypto licensing regimes under MiCAR.
The MISP remains under negotiation, with further discussions expected in May 2026.

12. EU - Fund Data

ESMA publishes Final Report on the integrated collection of funds’ data

On 4 May 2026, ESMA published its Final Report on the integrated collection of funds’ data. The Final Report sets out ESMA’s proposed approach to an integrated reporting system for investment funds under the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the Undertakings for Collective Investment in Transferable Securities Directive (Directive 2009/65/EC) (UCITS Directive).

The Final Report follows ESMA’s July 2025 discussion paper, covered in our July 2025 Update. The Final Report sets out a proposed move away from fragmented national and EU reporting requirements towards a common EU-wide reporting framework. ESMA’s proposed model is based on a single, modular, and dynamic reporting template, supported by a common regulatory data dictionary, aligned data semantics, and a ‘report once, use many times’ reporting flow.

Under ESMA’s proposed hybrid operational model, fund data would continue to be collected at national level, but data validation, storage, sharing, and analytics would be organised through an EU-level centralised hub. ESMA considers that this should reduce duplicative requests and improve data quality whilst supporting supervisory convergence and allowing for systemic risk assessment and financial stability monitoring at an EU-wide level.

ESMA proposes a phased implementation, with ‘Phase 1’ consolidating AIFMD and UCITS supervisory reporting and ‘Phase 2’ extending the integrated framework to reporting under, for example, the Money Market Funds Regulation ((EU) 2017/1131) and statistical reporting requirements. Existing templates would remain in place until replaced by new templates that have been implemented, tested, and shown to be sufficiently robust.

ESMA expects to consult on draft regulatory technical standards (RTS) and implementing technical standards later in 2026 and submit these by April 2027. ESMA also intends to begin developing the relevant IT infrastructure in 2027, with Phase 1 reporting not commencing before H1 2029 at the earliest.

13. EU - MiFID / MiFIR

Commission adopts RTS on investment firms’ order execution policies

On 14 April 2026, the Commission adopted a Delegated Regulation setting out RTS on the criteria that investment firms must take into account when establishing and assessing the effectiveness of their order execution policies under Directive 2014/65/EU (MiFID II).

The RTS are intended to support the ‘best execution’ obligation under Article 27 of MiFID II by specifying requirements around the selection of execution venues, order routing, client instructions, dealing on own account, monitoring, and periodic assessment of execution policies. The RTS require investment firms to maintain internal governance procedures for selecting execution venues and an internal list of approved venues, including information on the classes of financial instruments, transaction types, and client categories for which each venue may be used.

Firms will also need to set out the arrangements and valuation systems used to check price fairness, including for over-the-counter and bespoke products, and explain how they manage best execution where they execute client orders by dealing on own account. For firms using automatic order routing, the order execution policy must describe the system’s key features and how it is designed to achieve the best possible result for clients.

The RTS also introduces more detailed monitoring and review obligations. Firms must monitor whether orders are executed in line with their policy, assess execution quality against reference data and pre-determined thresholds, and review the effectiveness of the policy at least annually or following a material change. Firms using only one execution venue for a class of financial instruments must justify that approach and periodically compare results against available alternatives.

The RTS will now be subject to the EU legislative procedure and will apply 18 months after the Delegated Regulation’s entry into force to give investment firms time to adjust their order execution policies and related procedures and IT infrastructure.

ESMA publishes interim report on the holistic review of transaction reporting

On 4 May 2026, ESMA published an interim report on its holistic review of regulatory transaction reporting. The interim report follows ESMA’s June 2025 call for evidence (CfE) on a comprehensive approach to the simplification of financial transaction reporting (as covered in our July 2025 Update).

The review focuses on ways to simplify and streamline transaction reporting across EMIR, the Markets in Financial Instruments Regulation ((EU) No 600/2014) (MiFIR), and the Securities Financing Transactions Regulation ((EU) 2015/2365) (SFTR). ESMA noted that respondents generally supported its identification of the main cost drivers related to transaction reporting, including overlapping and inconsistent reporting requirements, frequent and unsynchronised regulatory changes, fragmented reporting channels, duplicated IT systems and processes, and dual-sided reporting obligations.

Based on stakeholder feedback, ESMA has narrowed further analysis to two potential approaches: either (i) delineation by type of instrument (Option 1a) or (ii) a longer-term ‘report once’ model (Option 2a). Option 1a may provide a lower-cost and shorter-term option that could provide a phased pathway towards Option 2a, which is viewed as the preferred longer-term model given the greater potential for simplification and rationalisation of reporting channels.

ESMA also notes that stakeholders believe further work is needed to reduce the burden associated with dual-sided reporting under EMIR and SFTR while preserving the scope of information available to authorities and maintaining data quality.

The interim report does not contain final policy recommendations. ESMA is undertaking a cost-benefit analysis and will continue engagement with market participants, including through an open hearing on 28 May 2026, before publishing its Final Report by July 2026.

ESMA publishes call for evidence on equity market structure

On 30 April 2026, ESMA published a CfE on the market structure of European equity markets. The CfE is intended to provide an objective, data-driven description of the European equity trading landscape, based on transaction data provided under MiFIR from 2022 to 2025. ESMA is seeking feedback on identified market trends and whether legislative or regulatory measures may be needed to address them.

ESMA’s analysis identified a decrease in lit continuous trading over the period, counterbalanced by growth in other forms of trading, including closing auctions, frequent batch auctions, and systematic internaliser (SI) trading. ESMA notes that lit continuous trading remains important for efficient price formation and price discovery, including by providing a reference price for other execution methods. The CfE also includes detailed analysis of dark trading, periodic auctions, and SI business models, with ESMA noting that dark trading remained relatively limited over the specified period.

ESMA is also seeking views on benchmark transactions, member preferencing and whether changes to the post-trade transparency flagging framework are needed to better identify ‘addressable liquidity’ and price-forming transactions.

Comments can be submitted until 30 June 2026. ESMA expects to publish a feedback statement in Q3 2026 and will continue monitoring market developments, including the impact of recent changes under MiFIR to the volume cap regime and SI transparency obligations.

14. EU - EMIR

ESMA publishes templates and instructions for AAR reporting

On 13 April 2026, ESMA published reporting templates and instructions for the active account requirement (AAR) introduced to EMIR under the EMIR 3 reforms (as covered in our January 2026 Update). The templates are intended to standardise how entities subject to the AAR report information to competent authorities, covering counterparty information, activities and risk exposures, the representative obligation, and operational conditions.

The first AAR reporting submission is expected on 31 July 2026, covering the period from 25 June 2025 to 30 June 2026. After that, reporting will take place every six months, with submissions due on 31 January and 31 July each year.

ISDA publishes response to ESMA consultation on PTRR clearing

On 22 April 2026, ISDA published its response to ESMA’s consultation paper on draft RTS for the post-trade risk reduction (PTRR) under EMIR (as covered in our March 2026 Update). ISDA generally supports ESMA’s approach to the recognition of PTRR services, noting that there should be an expectation that there will be a demand for new types of PTRR services.

However, ISDA also provided certain comments and amendments to ESMA’s paper, including that the existing safeguards (e.g., requirements on risk reduction, neutrality, and EMIR reporting) sufficiently prevent circumvention of the clearing obligation, and so no further restrictions should be applied. ISDA also notes that additional rules on governance, conflicts of interest, and compliance are unnecessary, as PTRR service providers are already subject to certain requirements as MiFID investment firms. Additionally, ISDA suggested that PTRR service requirements should avoid duplicative reporting and record-keeping.

15. EU - ESG

Commission adopts disclosure and separation of activities RTS under ESG Ratings Regulation

The Commission has adopted four Delegated Regulations containing guidance and the final RTS made under Regulation (EU) 2024/3005 on environmental, social, and governance (ESG) rating activities (the ESG Ratings Regulation). For further background on these RTS, please see our previous June 2025 Update.

• Delegated Regulation C(2026)2503 (the Disclosure RTS) specifies the elements of ESG rating products that ESG rating providers must disclose to the public and to users of ESG ratings, rated items, and issuers of rated items. The RTS cover, among other things, product-level disclosures on what is rated, the risks and impacts measured, materiality, the “E,” “S,” and “G” factors covered, methodologies, data limitations, ownership links, fee models, conflict risks, use of non-public data, and methodology revisions. The purpose of the Disclosure RTS is to promote comparable and consistent disclosure of ESG rating information.
• Delegated Regulation C(2026)2495 (the Separation of Activities RTS) specifies the measures and safeguards that ESG rating providers must implement to separate ESG rating activities from other activities. The Separation of Activities RTS require, among other things, separate organisational structures and reporting lines, physical separation measures, annual self-declarations by relevant staff, and additional information-security, internal-control, training, and compliance monitoring measures where ESG rating providers also undertake certain financial services activities. Additional safeguards apply where an ESG rating provider also provides benchmarks.

Two additional Delegated Regulations cover the fees that ESMA may charge and the procedures that ESMA must follow when seeking to impose fines or periodic penalty payments.

In line with the EU legislative procedure, the Council of the EU and European Parliament will now scrutinise the Delegated Regulations before they are published in the Official Journal of the European Union and enter into force 20 days after publication. The Disclosure RTS and Separation RTS will apply from 2 July 2026, in line with the application date of the ESG Ratings Regulation.

16. EU — Private Credit

ESMA seeks evidence on restricted subscription and private credit ratings

On 16 April 2026, ESMA published a CfE on restricted subscription and private credit ratings under the EU Credit Rating Agencies Regulation (Regulation (EC) No 1060/2009) (the CRA Regulation). The CfE reflects ESMA’s view that such products are increasingly being used alongside, or instead of, publicly disseminated ratings, particularly in private market segments.

ESMA distinguishes between:

• restricted subscription credit ratings, which are issued by registered or certified credit rating agencies, distributed selectively to a limited group of subscribers with an economic interest in the rated entity, instrument, or exposure, and may be used for regulatory purposes; and
• private credit ratings, which are produced pursuant to an individual order, provided exclusively to the person who requested them, are not intended for public disclosure or subscription distribution, and fall outside the scope of the CRA Regulation.

As such, ESMA is seeking evidence on the market need for these ratings, how they are produced and distributed, and the extent to which they raise risks around selective access to rating information. In particular, ESMA is seeking input on the use cases for these products, the types of parties involved, whether their governance and internal controls are comparable to those applied to public ratings, and whether current disclosure practices adequately support market transparency and investor protection.

Responses are due by 31 May 2026. ESMA will use the feedback to assess whether regulatory adjustments or clarifications are needed as regards the application of the CRA Regulation to these rating products.

17. EU - Capital Requirements

EBA consults on revised Guidelines on exposures to shadow banking under CRR

On 9 April 2026, the European Banking Authority (EBA) published a consultation paper on revised draft Guidelines on how institutions should manage and monitor their exposure to shadow banking entities carrying out banking activities outside a regulated framework under the Capital Requirements Regulation (Regulation (EU) No 575/2013) (CRR).

The draft revised Guidelines aim to align with the harmonised definition of shadow banking entities introduced by RTS (Commission Delegated Regulation (EU) 2023/2779) made under the CRR, which specify criteria to identify shadow banking entities for large-exposure reporting. As such, the Guidelines aim to ensure consistency with the relevant RTS, including updating complementary provisions on governance, internal risk management, and supervisory practices.

More broadly, the EBA is seeking feedback on current market practices and the potential effects of quantitative limits on institutions’ lending to shadow banking entities. In particular, the EBA is asking institutions how they identify relevant exposures, set internal limits, and manage the associated risks.
The consultation closes on 9 July 2026. The EBA is required to update the Guidelines by January 2027 and will use the findings to report to the Commission by December 2027 on institutions’ exposures to shadow banking entities.

18. EU - AML

AMLA consults on draft guidelines and RTS on group-wide requirements and business-wide risk assessment

On 17 April 2026, the EU Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA) published two consultation papers outlining draft guidelines and RTS made under Regulation (EU) 2024/1624 (the AML Regulation).

The first consultation provides draft guidelines on the business-wide risk assessment (BWRA). The draft guidelines specify the minimum content of the BWRA and additional sources of information that obliged entities should consider. AMLA proposes four minimum requirements: a business and operational overview; identification and assessment of inherent money laundering, terrorist financing, and targeted financial sanctions risks; assessment of the quality of such controls; and assessment and classification of residual risks. The draft guidelines emphasise the importance of proportionality, documented methodology, management body approval, employee awareness, and use of the BWRA to drive risk-based remediation and mitigation. Comments on the draft BWRA guidelines are requested by 15 July 2026, with final guidelines expected in Q4 2026.

The second consultation outlines draft RTS on group-wide requirements and additional measures for branches and subsidiaries in third countries. The draft RTS specify minimum requirements for group-wide policies, procedures, and controls; information-sharing standards within groups; criteria for identifying the EU parent undertaking in certain cases; and conditions for applying equivalent group-wide requirements to structures such as networks, partnerships, and franchises. They also specify measures to be taken where third-country law prevents branches or subsidiaries from applying requirements under the AML Regulation and the supervisory actions that may follow where those measures are insufficient. Comments on the draft RTS are requested by 15 June 2026, with AMLA expected to submit final draft RTS to the Commission by 30 September 2026.